STEPHANOPOULOS: ... working with President Obama, and wrestling
with his own party.

SCHWARZENEGGER: We've got to bring people to the center.

STEPHANOPOULOS: Is California's crisis the rest of the country's
future? Then...

FEDERAL RESERVE CHAIRMAN BEN BERNANKE: If we do not stabilize
the financial system, the fiscal policy will not lead to a sustained
recovery.

STEPHANOPOULOS: ... can the banks be saved? Will the
president's stimulus and housing plans work? What's next for the
economy? A powerhouse roundtable on the challenges ahead, with George
Will, Nobel Prize-winner Paul Krugman, BusinessWeek columnist Suzy
Welch, and the economist called "Dr. Doom" for predicting the crash,
Nouriel Roubini.

And, as always, the Sunday funnies.

JAY LENO, TALK SHOW HOST: They're leaning towards the Swedish
model for banks. It's -- and I've got another idea. How about
opening banks with all Swedish models? See, that's a bank I could go
to.

(END VIDEO CLIP)

ANNOUNCER: From the heart of the nation's capital, "This Week"
with ABC News chief Washington correspondent George Stephanopoulos,
live from the Newseum on Pennsylvania Avenue.

STEPHANOPOULOS: So back in Sacramento, you're getting it from
both sides. Democrats say you cut spending too much; Republicans say
you raised taxes too much. Is D.C. the safest place for you this
weekend?

SCHWARZENEGGER: Well, I think that it is always terrific. And I
have told you that many times that, when you're in the center, you get
attacked from the left and you get attacked from the right. And this
is a good sign, actually, because that means that you're in the right
place.

Because remember one thing: What is good for the people is not
always good for politics. That's the important thing here.
STEPHANOPOULOS: But it seems like the most anger you're getting
comes from your own party, the Republican Party. There's a petition
circulated at the California convention -- Republican Party convention
this weekend bashing you for going back on taxes and saying you owe
former Governor Gray Davis an apology for the recall campaign you ran
against the car tax back in 2003.

I want to show people a little bit of that campaign.

(BEGIN VIDEO CLIP)

SCHWARZENEGGER: When I get to Sacramento, I will immediately
destroy the car tax, so watch what's going to happen over there to a
car. Watch over there.

(APPLAUSE)

Hasta la vista, baby, to the car tax!

(END VIDEO CLIP)

STEPHANOPOULOS: So do you owe Gray Davis an apology?

SCHWARZENEGGER: No, absolutely not. I mean, there's quite a
difference, because remember one thing: When the last time they had
the crisis in 2003, nothing was accomplished. Now we have this
crisis, we got the legislators together, the Democrats and the
Republicans.

We had the biggest budget deficit, $42 billion, got them together
and met in the middle, that not only did we have, you know, had the
cuts all for about $15 billion, but we had a revenue increase of
around $12 billion, and on top of that we got huge reforms out of
that, reforms that no one has ever dreamt of for the last 60 years in
California.

The reason why we went through this roller coaster ride,
financial roller coaster ride in California was because we didn't have
a great budget system. We never had a rainy day fund; we didn't have
a cap; we didn't have mid-year cutting authority or any of those
things. For the first time in 60 years, we got all of this now as
part of the budget negotiations. This is a huge coup.

STEPHANOPOULOS: But you're...

SCHWARZENEGGER: And it is a great, great asset for the people of
California.

STEPHANOPOULOS: But you're not out of the woods yet. A lot of
those reforms still have to pass in referendums. And if the bond
issue, for example, doesn't pass, you're going to be right back in
negotiations.

SCHWARZENEGGER: I can tell you one thing, that when you go and
gather signatures for a referendum, then there is, you know, kind of a
50-50 shot. But usually when you have both parties pass a referendum,
that means that both parties are going to go out and campaign for
those referendums.

If it's the budget reform, if is the lottery, all the kind of
things -- and the open primaries -- I think all of those things, you
will see that both parties will go out there and -- and -- and
campaign, even though the parties sometimes are against some of those
initiatives.

STEPHANOPOULOS: But back in 2003, you were unequivocal, "I will
not raise taxes." You ran that car tax issue so hard. So -- so as
you look back, was it wrong to make the promise?

SCHWARZENEGGER: No, absolutely not, because you...

STEPHANOPOULOS: Why not?

SCHWARZENEGGER: I'll tell you why. Because I made it very clear
that I'm against raising taxes, and even today I hate tax increases.
But I also made it very clear...

STEPHANOPOULOS: But so did Gray Davis. And he just felt the
budget crisis made it necessary.

SCHWARZENEGGER: But -- but I also made it very clear that I will
never sign a pledge that I will not raise taxes. Why? Because I
said, if there's an emergency, I want to have the options to raise
taxes if there's an emergency.

Right now, you have to admit, we have a fiscal emergency. We
have a financial crisis. We have a housing crisis, all of those
things. And we had a $42 billion deficit. That's the same as having
an earthquake or some other disaster.

It's an emergency. And under those circumstances, we can raise
taxes. And remember one thing: It has nothing to do with Gray Davis
or any other specific politicians. You had people like Ronald Reagan
increasing taxes and increasing spending by 13 percent. You had
Wilson increase taxes. You had Deukmejian increase taxes. And I had
to increase taxes.

SCHWARZENEGGER: You do the kind of things that are right for the
people, that are right for the state, rather than what is right for
your party. It was not right for my party. The Republicans, the
party itself hates it, even though I had other Republicans vote right
along on that budget. That's how we got it passed, because we need
two-thirds of the votes in order to pass a budget.

STEPHANOPOULOS: So when you -- we're looking at a similar budget
crisis in the coming years here in the United States. Does the
Republican Party have to re-think its absolute opposition to tax
increases of any kind?

SCHWARZENEGGER: Well, no, I think that the Republican Party or
any party has to always think, when you make a decision, "Do I want to
make a decision that's based -- that's best for the party? Or am I a
public servant and have to serve the people, what is best for the
people?"

And in this particular case, in order to solve a $42 billion
deficit, the only way you can do that is a combination of making
severe cuts and also having some revenue increases.

STEPHANOPOULOS: How -- how long is it going to take California
to dig itself out of this hole?

SCHWARZENEGGER: I think that you will see that there's a
nationwide and a worldwide crisis right now. I think every country in
the world is scrambling right now and does really have some serious
problems with revenues with their businesses, with their housing, and
with all of those things. I mean, it's -- it's worldwide. All the
other states have the same kind of problem.

So I think that it would take -- and yesterday we had some
briefings where Bernanke was to give a speech and other people,
experts. It is very clear that we will see kind of a pick-up again,
if you will, beginning of next year, that we will...

STEPHANOPOULOS: But not this year?

SCHWARZENEGGER: ... when we -- when will we come back to normal
again? I think that could take years from now to get back to where we
were.

STEPHANOPOULOS: And you think President Obama's stimulus package
is an important component of that. You are at odds with a lot of
Republicans, especially here in Washington. They almost all voted
against it. The chair of the Republican Governors Association, Mark
Sanford, Governor Mark Sanford of South Carolina, said it's a huge
mistake.

(BEGIN VIDEO CLIP)

GOV. MARK SANFORD, R-S.C.: We're a nation that has $52 trillion
of accumulated liability, $52 trillion of political promises that have
been made, but not paid for. And the idea of stacking up another
trillion, another trillion, another trillion, we really do get to that
tipping point.

(END VIDEO CLIP)

STEPHANOPOULOS: What's your response to him?

SCHWARZENEGGER: Well, Governor Sanford says that he does not
want to take the money, the federal stimulus package money. And I
want to say to him: I'll take it. I'm more than happy to take his
money or any other governor in this country that doesn't want to take
this money, I take it, because we in California can need it.

I think that it is a terrific package. I think that, if you ask
1,000 people for their opinion what is their ideal stimulus package,
you will have a 1,000 different answers. So everyone's is a little
different.

I think that he has done a great job. And I think California
benefits tremendously from that $80 billion that is tax benefits there
of around $35 billion. There's other advantages, $45 billion of
monies that go to transportation, to education, to health care, and
all those different areas.

And there's even some money in there that could benefit our --
our revenues or, I should say, our budget itself. We have a trigger
language built in there so that, if some money comes to that, then we
will reduce the cuts and we will increase the spending.

STEPHANOPOULOS: But Governor -- Governor Sanford and Governor
Jindal and several other Republican governors are not only against the
stimulus package in principle, because it's going to add to our debt,
they say that some of the specific provisions, like some of the
unemployment provisions, are going to guarantee -- make tax increases
necessary in their states in future years. Is that what's going to
happen in California?

SCHWARZENEGGER: Well, no, I don't see it this way. I see only a
benefit to the state of California. That President Obama is going to
eventually do a tax increase on the wealthier people, I think that
writing is on the wall. I think he has talked about that during his
campaign.

STEPHANOPOULOS: It's in the budget now.

SCHWARZENEGGER: And I don't like that, of course, but, I mean, I
understand that he is to do what he thinks is best for the -- for the
country, as much as I had to make decision what is best for the state
of California. So I think there are certain things that are
inevitable, especially when you have a crisis like this.

STEPHANOPOULOS: So when you see Governor Sanford, when you see
the Republican leadership here in Capitol Hill absolutely opposed to
this, are they being unrealistic?

SCHWARZENEGGER: No, I think that people have different opinions.
I mean, I think that Governor Sanford is a very, very smart guy, but
he has a different way of looking at that. And a lot of my colleagues
look at this differently.

I look at it in a more optimistic way, and I feel very strongly
that I think that President Obama right now needs team players. He --
this is why we're here in Washington right now. We have, you know,
more than 40 governors coming together here in Washington, and our
idea is to get together with the White House, with this
administration, and to work together, to have Congress, the White
House, and the governors, and everyone work together, because it's a
very difficult time now, where we have to play together, rather than
using politics and always attacking everything...

(CROSSTALK)

STEPHANOPOULOS: You know, Senator Arlen Specter of Pennsylvania
agrees with you. And he was one of the Republicans who voted for the
president's package. And he says that the rest of the party risks
becoming the party of Herbert Hoover. Are you worried about that?

SCHWARZENEGGER: Well, you know, people always, you know, say
that the Republicans are always the party of no and, you know,
attacking the Democrats. You know, I don't think that the Republican
Party is any different than the Democratic Party. I think that
politics -- the horrible thing about politics is that, the more they
attack each other, the more that they try to derail each other, the
worse it is for the people. That's why...

STEPHANOPOULOS: But these are real differences of principle.

SCHWARZENEGGER: I know, but that's why I said, you know, you've
got to go beyond just the principles. You've got to go and say, "What
is right for the country right now?" I mean, I see that as kind of
like, you go to a doctor, the doctor's office, and say, "Look, can you
examine me?" The doctor says, "You have cancer."

What you want to do at that point is you want to see this team of
doctors around you, have their act together, be very clear, and say,
"This is what we need to do," rather than see a bunch of doctors
fighting in front of you and arguing about the treatment. I mean,
that is the worse thing. It creates insecurity in the patient.

The same is with the people in America. That creates insecurity
when you have those two parties always arguing and attacking each
other, rather than coming together and saying to the American people,
"Here's the recipe. This is going to be tough, but this is what we
need to do for the next two years. And we both believe in that."
That will bring calmness to the market and stability to the market.

STEPHANOPOULOS: So you think Republican leaders in Washington
should be cooperating more with President Obama?

SCHWARZENEGGER: I think that, if they -- they should make an
effort to work together and to find what is best for the people,
because by derailing everything, it's not going to help anybody, and
it creates instability and insecurity.

And I think, also, the Obama administration -- I mean, as you
know, the president is very clear when -- in his message. And he's a
very great speaker and articulates really well. But there's people
around him that they -- they also have to have that same clarity when
they go out there, and make people feel at ease and that they have
their act together.

And I think that, all together, we can really bring this country
back, because I tell you, no matter where you look, this is still by
far the best country in the world. There is no one that can come even
close to us.

STEPHANOPOULOS: Yet California has one of the worst foreclosure
crises in the country right now. President Obama laid out his plan to
deal with that this week. And a lot of critics said that this is, you
know, creating a moral hazard, it's bailing out people when those who
were responsible with their mortgage, they're getting no government
help.

SCHWARZENEGGER: Well, you know, there is people that are failing
with their mortgages because they have been laid off, they've lost
their jobs. There's others that they signed up to a deal where they
didn't know there will be this bump in the interest rate and all this.

What we have in -- in California is we have sat down with the
lenders and we have worked out a voluntary agreement with them to go
and do modifications, loan modifications, where we had them reduce the
interest rate or where we amortized the -- the loans out further,
another extra 10 years.

And so I think that's what the -- the federal government -- as a
matter of fact, Sheila Bair has recommended that already more than a
year ago, and she has been terrific with that housing crisis.

So I think that everyone is making the effort, but things change,
also, all the time. Right now, for instance, the big thing is that we
know that in -- in commercial real estate, there will be a shoe
dropping very soon, because I think all of those companies that are
now, you know, having financial trouble or getting bankrupt, they will
not be able to make their payments, the lease payments and so on, and
they will pull out. And all of a sudden, you have a real estate
building with only half of the places rented.

STEPHANOPOULOS: But on this question of fairness, what do you
say to the homeowner who didn't buy too much house, who took an extra
job to make sure they -- they made their mortgage payments, and they
see their next-door neighbor getting bailed out?

SCHWARZENEGGER: Well, first of all, every situation is
different, as you know, that maybe have a job, you can still afford
your house. Maybe your neighbor has just lost their job. Isn't it
nice when you, for instance, work something out with the bank, where
the bank says, "Look, while you're in this situation, we're going to
stop you from having to pay. I mean, we understand that you cannot
make the payment. We don't want to throw you out of the house. For
the next six months, we will not charge you for your -- for your
mortgage payment"?

So I think that people just need a little bit of help. What does
the bank do when they get stuck with a house that is 40 percent -- has
40 percent less value? I mean, that has been a huge problem in this
country in general, because eventually they think that the banks have
to -- and the lending institutions have to figure out what to do with
that asset. You know, should it be written off, those trillions of
dollars of assets?

STEPHANOPOULOS: You've talked often about how you first came to
the United States in part because of your hatred of socialism, of the
whole socialist system. So I wonder, when you look at government
coming in, taking over mortgage companies, taking over insurance
companies, the prospect now of nationalization of banks, is that
something you now see as necessary?

SCHWARZENEGGER: Well, I -- first of all, I think that we have a
really good system here in America. You don't have to talk about
nationalization. All it basically says is that if a bank doesn't have
the money to -- to give their customers, so if it, you know, defaults
in some way, that the federal government comes in, because it secures
those moneys.

SCHWARZENEGGER: And so they come in, and they help out, that
they go with the bank, because they cannot make the payments anymore,
and -- and to business. So the federal government always had that
right to take over. So it's not nationalizing anything. I don't see
it as such. There's a difference of the way it is in Europe, where
the -- where the federal government owns some of those banks, whereas
here only if there is a problem financially that the federal
government comes in and takes over and helps out.

STEPHANOPOULOS: Well, and we're seeing that now...

SCHWARZENEGGER: And that's a huge service to the people of
America, to have that security to know that, no matter what happens,
the federal government will step in and will get your money.

STEPHANOPOULOS: But then the question is, these -- these capital
infusions from the federal government may give them essentially
majority stake in some of the biggest banks in the country. Is that
something you're prepared to accept?

SCHWARZENEGGER: Well, with some banks, that's maybe necessary.
I think the most important thing is, how do we create stability in
this country? And I think this is why it is very important that the
administration has a very clear message and not change it.

I think that what America has really gone through, a huge
challenge just this last year, because we have had a different
administration. They have a different way of thinking. No -- no one
here is right or wrong, but a different way of thinking.

Then, in the middle of this crisis, you had a change of
administration. Now this administration is in for a month. You can't
expect them all of a sudden to have all the answers and all of those
things. They need still time to warm up and to get going.

And he has some -- Obama has some terrific people there in those
leadership positions. And so I have total confidence in them.

STEPHANOPOULOS: You've had a lot of praise for the president and
his team and his plans over the last several weeks. And a lot of
Republicans hear that and say, "Wait a second. You don't agree with
us on the stimulus. You're supporting President Obama on energy and
the environment and his budget plans. You don't agree with us on
abortion or gay rights. So why are you still a Republican?"

SCHWARZENEGGER: Well, because I still believe in the Republican
principles, but remember one thing, that it doesn't really matter if
you're a Republican or Democrat. I think that so many people get
caught up with this whole thing.

We are elected to be public servants. So what does it matter if
you're a Democrat or a Republican? When people need to have roads
built, when we talk about infrastructure in America, we need $1.7
trillion to $2 trillion of infrastructure in America. Who cares if
you're a Republican or Democrat? Everyone is using the roads.
Everyone would use high-speed rail. Everyone uses the infrastructure
and all of those things, the schools, the kids.

It doesn't matter. We should go beyond all this. Is it a
Republican idea or is it a Democratic idea? Which philosophy does it
fall under? It doesn't matter.

STEPHANOPOULOS: You're trying...

SCHWARZENEGGER: We've got to rebuild America. And we've got to
help people, be public servants, not party servants.

STEPHANOPOULOS: You're trying to further that by having this
system of open primaries...

SCHWARZENEGGER: That's right.

STEPHANOPOULOS: ... in California. Whoever -- everyone runs,
the top two finishers, whatever party they come from, they're on the
ballot in the general election. You seem to have unified both parties
with that idea, the Republican Party leadership, Democratic Party
leadership both against it. Do you really think it can make a
difference?

SCHWARZENEGGER: It will make a huge difference. And remember
one thing: It's always great when the Democratic Party and the
Republican Party is against something, because that means it's good
for the people. That is the bottom line.

Open primaries is good for the people because then people don't
have to make decision and say things to appeal with their party so
they can win the primary and then, all of a sudden, they have to come
to the middle. So to say something totally different that is one
campaign and, later on, they have to campaign for the overall to -- to
-- to win the election.

So I think it's horrible to have to move around. Let's open up
the primaries, no different than when you have a mayoral race. Like
in Los Angeles right now, Villaraigosa -- there's an open primary.
There's an open election, where you have the first two -- the two top
candidates then have a run-off election. That's the way to do it. It
doesn't matter which party it is.

If the people choose one, if they're Democrat, then so be it. If
they choose the Republican, if they choose a Democrat and a
Republican, and they have them go for the run-off election, that's the
way it ought to be.
STEPHANOPOULOS: Yet you still call yourself a Republican. And
you're here with a lot of your fellow Republican governors this week.
And I wonder what you think the prescription is for the Republican
Party to go now from minority status to get the majorities back in the
House and the Senate, to get the White House back.

SCHWARZENEGGER: It's very simple. Listen to the people. The
best thing you can do, no matter what party you're in, listen to the
people. In California, we know that 64 percent of the people have
said that we should solve this budget crisis, the $42 billion deficit,
with tax increases and with spending cuts. So what I have done is
what the majority of Californians want to do.

The Republican there were not in touch with of what the majority
of people want to do in California. And the same is nationwide.
You've got to listen to the people. If the nation is screaming out
loud, "We need health care reform. We want to have universal health
care. We want to have everyone insured. We want to bring the costs
down. We want everyone to have access." I mean, that's what they
want; that's what you do.

STEPHANOPOULOS: Even if it requires tax increases?

SCHWARZENEGGER: Even -- if -- no, even though it maybe is
against your principles or philosophy, you still have to go, because
that's what the people want you to do. And the same is in California.
So I will go again after health care reform. I will be going after,
you know, education reform, which, of course, we've got some good one,
because of the categoricals dropped by $6 billion, our categoricals,
so more money goes into the classroom now.

So you've got to do what the people want you to do rather than
getting stuck in your ideology.

STEPHANOPOULOS: There was also a report on the Web site TMZ this
week about your own future. It said you might be taking a bit part in
Sly Stallone's movie. Then you came back the next day and said, no,
I've got to get through the budget crisis first. You're through the
budget crisis now. Are you going to do it?

SCHWARZENEGGER: Well, no. As you know, since I've become
governor, I've done three cameos when friends asked me. And Sly asked
me if I would do a cameo. I said, "Of course I'll help you and do a
cameo. There's no two ways about that."

But it had nothing to do with the budget crisis or with the
budget negotiations, because that will be done some times in April,
May or June. I have no idea.

STEPHANOPOULOS: OK. So you still might do it?

SCHWARZENEGGER: Oh, yes, no, absolutely. I enjoy him. He's a
terrific director and writer and a great actor. And we hang out a lot
of times together.

STEPHANOPOULOS: How about after 2010? You're term-limited. Do
you run for Senate or do you go back to the movies?

SCHWARZENEGGER: I have no idea. You know, I'm not thinking now
about what I'm going to do, because remember one thing: As soon as I
stepped into this political arena, when I became governor, it was not
about "me." It was about "we." We turned that "me" upside-down. It
was about "we."

I mean, it's all about California. It's all about the people. I
have been very successful in creating some of the reforms that we
needed. If it is worker's comp reform, if it is rebuilding California
and their infrastructure, if it is the open primary, if it is the
redistricting that we won just last November, I'm a reformist. I want
to go in there and reform and fix what is broken in California. And I
will be relentless with that, and I never, ever give up.

STEPHANOPOULOS: We're out of time. What's your Oscar pick
tonight?

SCHWARZENEGGER: I really don't know. I mean, I think that "The
Reader" to me was one of the best movies, you know, one of the best
movies that I've ever seen. I think that movie has a great shot.
And, of course, "The Wrestler," my buddy, you know...

STEPHANOPOULOS: Mickey Rourke.

SCHWARZENEGGER: ... Mickey Rourke is a terrific actor. I wish
that he will be successful and do as well tonight. So there are some
really good movies...

(CROSSTALK)

STEPHANOPOULOS: And we asked all of our viewers for their
favorite political movie. Yours?

SCHWARZENEGGER: I think "The Reader."

STEPHANOPOULOS: "The Reader." Oh, political movies.

SCHWARZENEGGER: You mean all-time?

STEPHANOPOULOS: All-time.

SCHWARZENEGGER: Oh, political movie. "The Candidate," maybe, I
think, is -- is one of those great movies.

STEPHANOPOULOS: Governor Schwarzenegger, thanks very much.

SCHWARZENEGGER: Thank you very much. Thank you.

STEPHANOPOULOS: So "The Candidate" from Arnold Schwarzenegger.
All of you picked "All the President's Men."